The commercial contract has evolved as a means of developing an ongoing business trust and loyalty between trading parties. A contract is a document that expresses an agreement between trading partners for the execution of contractual activities. Most often the contractual activities will be commercial in nature, however a contract can also be used to govern the conduct of parties in non-commercial activities. The contract becomes the parties' reference in the execution of such activities, as well as legal evidence of the intention of the parties which governs any dispute regarding the activities.
Today, with trading and partnership taking place over widely dispersed geographical regions among parties that may never have met, the contract has become the cornerstone for closing and executing a buyer-seller business relationship. Business-to-consumer trading tends to involve single impulse transactions, supported either by implied contractual terms or by involved contract documentation setting out terms that have been essentially fixed by the seller. On the other hand, business-to-business (B2B) commerce, defined herein as using electronic interactions to conduct business among enterprises, is more likely to take the form of an ongoing partnership, with repeated transactions that may be of a varying character. Business-to-business commerce thus requires greater flexibility in the generation and execution of the contract governing the parties' ongoing business relationship.
In business-to-business trading the buyer can range from a small, home-based business to a large multi-national corporation dealing with retailers, manufactures, suppliers and other trading partners. However, common to all business-to-business trading is a contract negotiation and preparation cycle: the parties to a prospective commercial relationship interact in a dialog which culminates in an agreement for a one-time deal or an ongoing buyer-seller commitment, and subsequently one or more contractual activities take place within the framework of the agreement reached between the parties. The contractual activities are governed by the contract, a legally binding document that describes the parties' business relationship and the terms and conditions governing each activity. Even when trading over an electronic marketplace, buyers and sellers are bound indirectly by the contract administered and controlled by the marketplace owner. Contracts can be simple and straight forward, or very elaborate with a complicated set of business rules and many involved parties, depending upon many factors including the size and scope of the arrangement, legal regulations relevant to the contemplated activities, the industry involved, and so on.
Electronic commerce presents its own unique problems. Traders who are moving toward conducting commerce over the Internet, typically by either establishing a self-managed or hosted e-commerce “store” and following a one-to-one contract negotiation process, or by participating in a third party-managed “marketplace”, face four main problems from the perspective of negotiation and execution of the contract:
1. How to prepare and publish a business contract over the Internet—Conventionally traders have used text editors, copiers, facsimile transmission and mail to exchange contract drafts in a two-way dialog. More recently e-mail over the Internet has become a popular medium for exchanging unclassified contract drafts. However, none of these methods optimally delivers the required productivity, flexibility or control needed for an efficient electronic commerce contract-generating process.
2. How to collaboratively negotiate and approve a contract—Trading partners usually go through a contract negotiation process that can involve many individuals from different divisions within one or both traders. Contracts are normally created using standard templates and attachments or by modifying an existing contract from a previous similar arrangement. The selling organization always has the objective of reducing the contract preparation and negotiation cycles, however even with today's communication advances, this process may still take many months and can lead to business losses if deadlines are missed. This exposure is more dramatic in an accelerating e-commerce business-to-business market, where a wasted day can mean millions of dollars in lost revenues, or losing a deal to a competitor.
Two elements of the contract are primarily responsible for prolonging the contract negotiation cycle. First is the bilateral agreement on the deliverables, whether products or services. Second are the terms and conditions of the arrangement. Prices and discounts are typical examples of terms and conditions, since they reflect what the buyer will pay and what the seller will receive when contractual activities are executed under the agreement. However, there are many other factors in the terms and conditions which can in some situations have an equally significant impact, such as delivery arrangements, billing and payment terms and after sale services, for example.
At the end of the contract preparation and negotiation cycle, each party physically signs and seals the contract, and conducts contractual activities under the contract with reference to a stored copy.
3. How to integrate the contractual terms and conditions into an overall e-commerce solution used by the buyer and seller to execute contractual activities under the contract once the contract is signed—In most traditional solutions, an administrator feeds one or more back-end applications with parameters manually extracted from a printed copy of the signed contract. This can work effectively if the seller's marketing and sales divisions follow some rigid set of rules during the contract negotiation phase, but in most cases this does not happen and the seller organization ends up with a contract that does not fit precisely within the predefined back-end system parameters. In other words, the contract, or at least some terms and conditions in the contract, must be executed and controlled manually.
This can present significant administrative problems for a seller organization executing activities under hundreds of business contracts, each with unique terms and conditions, or in a marketplace used by thousands of interacting buyers and sellers, for example where the marketplace does not offer enough contractual flexibility to match the sales division creativity or cope with document formatting details required by the buyers' accounts payable staff.
Existing automated contract generation systems are of limited assistance, because they tend to consist of pre-written terms and conditions embedded directly into the contract document. This limits the flexibility of the contract and requires a skilled programmer to make revisions, taking control out of the hands of a properly trained contract administrator. Further, the automation ends with the closing (i.e. signing) of the contract document, so most of the administration and management of subsequent activities under the contract, including ensuring conformity with the terms of the contract, must be implemented manually.
4. How to bridge the process and policy “gap” with other trading partners—Business enterprises have developed their own methods of achieving their business goals, even within a particular region or industry. They have created processes and implemented manual systems and computer systems to achieve these goals. As these systems were evolving, enterprises encoded them with bits and pieces of their business “rules”, used to determine the processes implemented by that particular system and control their workflow. As a result, most business enterprises have scattered or fragmented business policy rules implemented in more than one computer or system, which are connected electronically, or more frequently manually, to achieve the overall enterprise process workflow. Changing an enterprise practice or policy thus often requires amending many application systems, and hence disturbing the workflow balance.
On the other hand, conducting electronic trading with another enterprise, either directly or through an e-marketplace, requires sharing and integrating business processes from both sides. It also entails sharing some policy rules and data to change or control the process workflow at the trading partner's side. Since such information neither originates from nor targets one central system, more integration points and cumbersome technological methods are required to achieve an effective enterprise-to-enterprise business processes molding.